After a significant sell-off in 2022, the S&P 500 index has bounced back in 2023, gaining 14% so far. But as impressive as this performance has been, some stocks have run circles around it.
Stock for the drugmaker Eli Lilly (LLY -1.38%) is up more than 49% in 2023, making it one of the hottest mega-cap stocks of the year. But this strong performance has potential future investors asking: Have I already missed the boat on this growth stock?
Let's delve into Eli Lilly's fundamentals and valuation to see if an answer can be found.
Nobody else is putting up growth like Eli Lilly
As you'd expect for a stock that has rallied, Eli Lilly's underlying fundamentals are very strong: Through the first half of 2023, the company has had seven products on pace to each generate at least $1 billion in revenue in 2023. This robust product portfolio has investors excited and it is a big part of why Eli Lilly now has a $513 billion market capitalization. That comfortably positions it ahead of Johnson & Johnson's $430 billion market value and makes it the world's largest pharmaceutical company.
| Eli Lilly's Top-Selling Pharmaceuticals | Revenue, First Half of 2023 |
|---|---|
| 1. Trulicity | $3.79 billion |
| 2. Verzenio | $1.68 billion |
| 3. Mounjaro | $1.55 billion |
| 4. Jardiance | $1.25 billion |
| 5. Taltz | $1.23 billion |
| 6. Humalog | $901 million |
| 7. Cyramza | $497 million |
Data source: Eli Lilly.
The Indianapolis-based company's total revenue in the second quarter advanced 28.1% year over year to $8.3 billion. With the exceptions of respective 5% and 1% drops in Trulicity and Humalog revenue, stemming from lower realized prices, each of Eli Lilly's top seven best-selling drugs sold more in the quarter. Growth ranged from 13% for oncology therapy Cyramza to 57% for the breast cancer treatment Verzenio.
Once again, Mounjaro was the major growth driver for Eli Lilly. Due to the timing of the product launch, quarterly revenue soared from just $16 million in the year-ago period to a blistering $979.7 million for Q2. This was almost double the nearly $570 million that the drug recorded in first-quarter revenue.
Eli Lilly's non-GAAP (adjusted) diluted earnings per share (EPS) climbed 68.8% year over year to $2.11 during the second quarter. As a result of a much higher revenue base and admirable control of its operating expenses, the company's non-GAAP net margin expanded by roughly 550 basis points to 22.9% in the quarter. This is how adjusted diluted EPS growth far outpaced total revenue growth for the quarter.
Image source: Getty Images.
The growth story could have more momentum left
Though Mounjaro alone could provide a major lift to the top line, Eli Lilly's pipeline is yet another reason to love the stock. The company has dozens of projects currently in clinical development; these include immunology therapy mirikizumab, and retatrutide, another potential hit drug for type 2 diabetes and weight loss. For these reasons, analysts think that Eli Lilly's adjusted diluted EPS will compound at 24.8% annually over the next five years. That blows away the drug manufacturer industry's average growth figure of 9.3%.
The dividend is skyrocketing
Eli Lilly's current 0.8% dividend yield doesn't seem to be attractive compared to the S&P 500 index's 1.6% yield. However, it's worth noting that the company has doubled its dividend in just the last five years. And given Eli Lilly's industry-leading growth forecast, it looks like this is merely the start of sizable dividend growth:
LLY Dividend data by YCharts.
Further supporting this theory, the company's dividend payout ratio is poised to clock in below 46% in 2023. That leaves Eli Lilly with the funds necessary to perfectly balance investing in growth opportunities, repaying debt, and hiking its payout.
The valuation leaves little margin for error
Eli Lilly leaves little doubt that it's firing on all cylinders. And while quite high in absolute terms, the forward price-to-earnings (P/E) ratio of 43.5 isn't ridiculously excessive. (For reference, the drug manufacturer industry's average is 13.7.)
Whether the stock is a buy at the current $548 share price depends entirely on your optimism that Eli Lilly can live up to growth expectations. If you're confident in the company's future, it may be worth slowly building a position over time. But if Eli Lilly doesn't meet the lofty analyst growth consensus, the downside from the current share price could be swift and steep.
